Reserve Diversification Continues To Lead Dollar Down
Pound Declines On The Week Over Dashed Thoughts Of Higher Rates
CAD Comes Under Pressure As Crude Declines
US Dollar - Not a lot for currency traders to go on today with economic data barely considered by a lot of market participants. Instead, dollar markets continued to show considerable weakness heading into the weekend as traders in other parts of the world woke up to find Chinas latest development. For those who missed out, yesterday afternoon the central bank head of China Zhou Xiaochuan stated that the countrys reserve plan continues to include further diversification away from US dollar based assets and into other assets carrying a higher rate of safety, efficiency and liquidity. The announcement becomes a notable concern for the worlds largest economy as the Chinese country holds $1 trillion in foreign exchange reserves, with a whopping 72 percent being sectioned for US dollar denominations. As a result, the sheer weight of positioning holds negative for the dollar as the statement coincides with recently similar announcements by the Russian central bank this year and the South Korean central bank last year. Coincidentally, the bearish notion is likely to be exacerbated come year end as the global arena comes to grips with confirmation that the Federal Reserve is likely to entertain notions of a short term rate cut early next year. As it seems, the only saving grace will now fall on how well Congress and the Executive administration co-exist along with continually stable economic fundamentals. With the Democratic party in full control of Congress, further protectionist measures may be forthcoming which is likely to conflict with the current administrations plans. Most importantly, it will likely exacerbate the current tensions between China and US trade relations, making Treasury Secreatary Henry Paulsons job a tad more difficult. All in all, dollar bullishness may well be placed on hold for the rest of the year, setting the scene up for a potentially rocky holiday season.
Euro and Swiss Franc - The Euro and Swiss franc both gained on the day despite economic data that should have otherwise proved a dour one for the two. Mostly encouraged by the news of diversification, euro traders disregarded data that was suggestive of a slowdown in the region. According to the mornings reports, not only did consumer inflation in France come in slower than expected, it seems that overall industrial and manufacturing production was led lower in the month. To put things into perspective, both measures fell almost double what was expected by the consensus, lending a overall bearish outlook for the year end. However, somewhat neutralizing the disappointing data was the OECD leading indicators report. Remaining stable at the 109.1 level for the month of September, the report matches the August reading and coincides with statements released by the Paris based organization for Economic Cooperation and Development that G7 regions are continually expanding. Although noting suggestions of slowing growth in the Euro area, the composite report is in line with recent spate of target interest rate hikes by major central banks, including the hawkish bias by the European Central and Swiss National Banks, as economies are indeed growing. The notion will likely keep Euro bidders on point with central banks in both economies expected to raise interest rates yet again in the short term, notably in the first quarter of 2007 if not before this December.
British Pound - A day after rates were hiked by 25 basis points, the markets continue to see no further upside in the target benchmark interest rate for next year. The notion is likely to keep downward pressure on the pound sterling, countering the strong appreciation that has taken place in the past couple of weeks. Now with the major currently hovering above the 1.9100 figure, traders and investors alike are focusing in on next weeks consumer price index report. Although this weeks BRC retail sales report sparked massive bidding on increases in consumer spending, the market is looking for indications that will effectively counter statements that were released following the decision in the United Kingdom. With the central bank stating that inflation is likely to abate in the near term, the report is expected to stay well above the previous 2.4 percent release, lending to further bias that policy makers will consider another course of action. Futures traders, however, are on the defensive as players pared back implied positions, taking the probability of more than one rate hike down a notch.
Japanese Yen - The yen was boosted on the day by further momentum from comments made by Governor Fukui. Speaking about rates, the Bank of Japan governor additionally noted in the overnight that higher interes rates would extend the current recovery in the worlds second largest economy. Although indicating concern over a massive unwinding of carry trades, the Fukui stated to lawmakers that gradual rate adjustments would help nurture long lasting economic growth. The message cant get any clearer than that. As a result, traders are now expecting another rate hike in the next two months as growth and inflationary pressures climb. The true test, however, will come with next weeks gross domestic product report, which will be released a day before the Bank of Japan meets to decide the fate of the benchmark rate. Should the report be higher than the consensus 1 percent expected, yen bullishness may finally be here for the year end.
Commodity Currencies (CAD, AUD, NZD) Commodity currencies were under pressure today with no economic data to really lead the majors higher against a down dollar. However, next week should provide for some action as the markets are expecting key data from New Zealand and Australia. Most notably, retail sales in the New Zealand economy should lend some short term strength as overall quarterly figures are expected to show a resilient consumer still living within the Kiwi borders. Australia will contend price indexes, taking note of the wage price report. Canadian dollar will likely continue its ties with crude oil, moving lower in the North American session as crude conrtacts dipped below the $60 a barrel at this afternoons settlement. However with a rebound expected, CAD near term strength looks encouraging.
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